What next for residential property?

What next for the residential property market?

Boringly enough, the housing market is set for a period of stagnation. It’s difficult to call, as there are a number of factors at play. In the longer term, the market will recover. Property is cyclical. There is an inherent undersupply and a desire in our society to own rather than rent. That having been said, it’s a little more complex when trying to assess the immediate future.

The first problem we have is data. All of the UK indices published focus on national house prices. What nonsense. An average price for a UK home is utterly meaningless. Other than being a relative figure for you to look at to comment upon how expensive it is and how lucky you are to have a home that’s below the national average or conversely, if you live in London probably, that only in your dreams could you pick up a property for that price. What a ridiculous waste of time. Apply growth figures to that notional figure. What’s the point in that? At best you see the shape of the curve at worst you are tainted in your view.

London is an extraordinary market. Inevitably what’s happening at the top end has a significant impact upon the national figures. Indeed for those with significant equity in their homes, the market is quite buoyant. Those unfettered by the lending institutions and their unwillingness to lend sensibly are actively buying and selling. Significant investment is still flowing into the top end of the market from overseas. Whilst we may have economic uncertainty, compared to the unrest elsewhere in the world and the economic meltdowns in a number of European countries, combined with the effective devaluation of the pound Sterling, the UK is an attractive proposition.

The area of the London market that is suffering is where debt is the main driver. Debt driven purchases are way down on their previous levels. I agree that 100% plus mortgages are not acceptable. And never should have been. Indeed how one could borrow more than the underlying asset was worth is beyond me. It also strikes me as odd that we are curtailed in borrowing by multiples of salary. Surely affordability is important. Not only now but should interest rates rise.

And that’s where lending institutions need to sharpen up. Their understanding of value, affordability and market movements is generally poor. Indeed lending criteria often come from senior management. They have never got to grips with the vagaries of the property market and have been incentivised by increasing market share or total lending rather than sensible lending based on sound principal.

Around the country we have another set of problems. Housing markets are driven by the health of the economy. Manchester is seeing a positive flip due to the influx of media types in Salford. Leeds, Birmingham and Edinburgh are popular destinations yet vast swathes of the nation remain moribund. Lacking in sales, purchases and movement resultant from lack lustre economic performance.

Stamp Duty isn’t helping anyone. It’s not helping government, as there are such low volumes of transactions. Whilst the market stagnates it doesn’t help homeowners either. If a market is rising fast so stamp duty and other attacks on capital can be absorbed. In a stagnant market it puts a heavy dampener on transactions occurring and makes a market illiquid. In order to help the market move we need to remove the barriers to entry. Reduce the burden on the homeowner and liquefy the market.

Back to those indices. The Land Registry published their recent numbers based on completed transactions. Shock. Horror. Prices have fallen by 1%. Nationally. What does that mean? Nothing. In fact what they don’t publish is the transactional levels. That’s where the problems lies and it’s increasing volumes and liquidity that will help people and the markets.

In essence we have a long hard slog ahead. London will continue to grow. Certainly in its traditional areas, driven by cash rich buyers. Some motorway corridors will also thrive as commuter belts bulge and second homes come back into vogue. Indeed some seaside resorts will continue to be popular destinations. Elsewhere we have a different tale to tell. Until economic growth returns and the nation’s finances come back into balance, we won’t see a massive fall. Just a hiatus. Stagnation. Low transaction volumes and a lack of investment.

I have always advocated property ownership on a personal level. The rules have changed, though. If you think your home is your pension, think again. If you think it will make you a fortune in a short space of time? Think again. And if you are mortgaged up to the hilt? Start to plan now for an interest rate rise. Interest rates will be much higher for a period of time before real growth returns to the housing market. Buy or live somewhere because you want to be there rather than for the financial benefit.

Brace yourselves, as the time ahead will be tough. Having said that, if you are a homeowner now and are still one in ten years time, you’ll be glad you weathered the storm.

Property values have been artificially inflated by self-cert loans, shared-equity schemes and the 100%+ mortgages you refer to…

With lenders requiring higher deposits, higher mortgage arrangement fees, the huge amount of Stamp Duty required, affordability (or lack of) will naturally lead to a downward pressure on values… the market should have crashed further following the credit crunch in ’07 and although Government Policy and low interest rates might prop up current prices where stock is low and there are cash buyers around, this is unlikely to be sustainable – decreased property development/investment and low property transaction levels are likely to lead to further businesses folding (2 estate agents have been forced to close down where I live) … other property related businesses are likely to follow…

The BoE now find themselves between a rock and hard place – if they raise rates now they risk the property market collapsing completely and further banks needing to be bailed out by taxpayers, but if they leave rates at 0.5% , a weak pound will drive up inflation further and many businesses who are already struggling with sales will not be able to absorb the further increased costs of imports…

Habitat last week and reports today of other businesses facing administration – the longer the BoE leave rates at 0.5% and we have a weak pound, the longer inflation will remain high, more businesses will collapse and Govt debt will increase – despite the austerity measures… the rift between rich & poor and North & South will widen – whatever policies the Govt. and BoE adopt they are unlikely to be able to sort out the growing economic and social mess we are facing…